Behavioral Economics:
Applications for Financial Services
Remember this number:
7238592 OR
| Amy Brown| March, 2010
61
Which snack would you like?
| Amy Brown| March, 2010
61
=
7238592
=
| Amy Brown| March, 2010
#1: The Power of Defaults
Making choices is often difficult.
As a result, the default option – what
h
happens
when
h you ddo nothing
thi – is
i often
ft
the most common outcome.
| Amy Brown| March, 2010
Application: While maintaining choice, set
d f l so the
defaults
h easiest
i option
i is
i broadly
b dl the
h “best”
“b ”
– or so alternatives require purposeful action.
Example: Switching from opt-in to an opt-out in a large corporation’s
401(k) plan increased participation by new hires from 37% to 86%,
and among the lowest-income
lowest income employees from 13% to 80%.
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
New Hires
Lowest Income
Lowest-Income
Employees
Opt
In
Opt
Out
| Amy Brown| March, 2010
How It’s Being
Applied to Financial
Regulation:
New opt-in
requirement
q
for debit
card overdraft
requires conscious
consumer choice.
#2: Hassle & Channel Factors
Even seemingly minor hassles can make us
much less likely to do something.
Ch
Channels
l point
i t us in
i a direction
di ti – andd we are
then more likely to keep going.
| Amy Brown| March, 2010
Application: Thinking from the consumer’s
perspective,
i look
l k for
f ways to reduce
d
hassles
h l andd
create channels to success.
Bank rep. on site
increases the #
opening accounts
How it’s being
applied to savings
policy: Purchase
U.S. Savings Bonds
on your tax form
Giving students a
map to the health
center increased #
who got inoculation
(Lewin)
| Amy Brown| March, 2010
#3: Mental Accounting
People compartmentalize money into
distinct categories and have different
propensities
iti to
t save or spendd from
f
different mental accounts.
| Amy Brown| March, 2010
Application: Use product or policy design to
create mentall accounts that
h support consumers’’
financial goals.
Q: Which option will likely result in the greatest amount saved from
$1,200 increase in income:
a.
b.
c.
d.
$50 additional in each paycheck (2x/month)
$1,200 one-time bonus check
$1,200 g
given as a VISA branded g
gift card
$1,200 deposited into a new savings account
How It’s Being Applied to Credit Cards:
New disclosures more clearly define an “account”
for interest charges over the life of the debt.
| Amy Brown| March, 2010
#4: Proliferation of Choice
We tend to think more choices are always
better. But when faced with too many
alternatives
lt
ti
(especially
(
i ll that
th t can’t’t be
b
easily compared), people are less likely to
choose any option.
| Amy Brown| March, 2010
Application: Focus on a limited set of options, or
structure choices
h i
to facilitate
f ili
decision-making.
d ii
ki
Tasting tables in an upscale grocery store:
Number of jams
displayed
Number who
stopped
Number who bought
jam
24
60%
3%
6
40%
30%
(Iyenger & Lepper, 2000; B. Schwarz, 2000)
How It’s Being Applied to
Mortgages:
Among proposals considered was
requirement for all lenders to offer a
“plain vanilla” mortgage that could
y compared.
p
be easily
| Amy Brown| March, 2010
#5: Identity & Affirmation
We may make different choices in the same
situation depending on identity.
W feel
We
f l more comfortable
f t bl making
ki a choice
h i
when we feel confident in ourselves or know
that others have made the same choice.
| Amy Brown| March, 2010
Application: Build consumer confidence in their
ability
bili to make
k goodd decisions.
d ii
Affirmation at Trenton Area Soup
p Kitchen:
Neutral: Describe what you might eat on a typical day
Affirmation: Think of a personal experience where you felt successful or proud
Neutral
Affirmation
Stopped to consider 44%
58%
Took information
79%
36%
(Crystal Hall, Princeton University dissertation)
Note: A “default” offering often takes on air of being the “recommended”
option, thereby instilling greater confidence (and increasing take-up)
among consumers. E.g. default 401(k) investment option.
| Amy Brown| March, 2010
Key Points to Remember
• There are no neutral choices – everything we do
influences people one way or the other.
• Knowing what to do and wanting to do it don’t
don t always
translate into action.
• By applying the lessons from behavioral economics, we
can make it easier for people to act in ways that support
their short- and long-term financial goals.
• B
Be careful
f l th
though.
h With so many b
behavioral
h i l iinfluences
fl
all around us, it’s hard to predict or know what changes
will make a difference.
| Amy Brown| March, 2010